Real Estate Investment Terms

The total amount paid to acquire the property, not including closing costs or financing fees.

Example: If you buy a building for $2,000,000, that is your purchase price.

Why it matters: The purchase price is the foundation for calculating returns and determining financing needs.

The total rentable or leasable area of the property, measured in square feet.

Example: A 50,000 SF office building means there are 50,000 square feet of rentable space.

Why it matters: Used to calculate price per SF, rent per SF, and compare properties of different sizes.

The total number of rentable units in a property, typically used for multifamily or mixed-use properties.

Example: An apartment complex with 50 individual apartments has 50 units.

Why it matters: Helps determine revenue potential and is used to calculate per-unit metrics.

The total rental income a property would generate if fully occupied at market rents.

Example: If you have 10 units renting at $1,500/month, GPR = 10 × $1,500 × 12 = $180,000/year

Why it matters: Represents the maximum potential income before accounting for vacancies and losses.

The actual expected rental income after accounting for vacancy and collection losses.

Example: With $180,000 GPR and 5% vacancy, EGI = $180,000 × 0.95 = $171,000

Why it matters: More realistic estimate of income used for calculating NOI and cash flows.

The percentage of rentable space that is currently leased and generating income.

Example: If 47 of 50 units are rented, occupancy = 47/50 = 94%

Why it matters: A key indicator of property performance and market demand. Higher occupancy means more stable income.

The expected yearly percentage increase in rental rates.

Example: With 3% annual rent growth, a $1,000/month rent becomes $1,030 next year.

Why it matters: Affects long-term projections and property value appreciation. Market conditions and lease terms influence this rate.

The recurring costs of running and maintaining a property, excluding debt service and capital expenditures.

Example: Common OpEx includes property management (3-5% of rent), property taxes, insurance, utilities, repairs, and maintenance.

Why it matters: Directly impacts NOI and cash flow. Lower OpEx relative to income means better returns.

Operating expenses as a percentage of gross revenue.

Example: If OpEx is $72,000 and GPR is $180,000, OER = 40%

Why it matters: Helps compare efficiency across properties. Lower ratios indicate more efficient operations.

One-time fees and expenses paid when purchasing a property.

Example: Includes title insurance, appraisal fees, legal fees, loan origination fees, environmental studies, and inspections.

Why it matters: Typically 2-5% of purchase price. Must be factored into total cash required to close the deal.

Fee paid to a professional company to manage day-to-day property operations.

Example: For $171,000 EGI at 5%, management fee = $8,550/year

Why it matters: Essential for passive investors. Self-management saves money but requires significant time.

Annual taxes assessed by local government based on property value.

Example: If assessed value is $2M and tax rate is 1.5%, annual taxes = $30,000

Why it matters: One of the largest operating expenses. Varies significantly by location and can increase with reassessment.

Money set aside for major repairs and replacements like roofs, HVAC, and parking lots.

Example: Setting aside $250/unit/year for a 50-unit property = $12,500/year in reserves.

Why it matters: Protects against unexpected major expenses. Critical for maintaining property value.

The income generated by a property after all operating expenses, but before debt service and taxes.

Example: With $171,000 EGI and $68,400 OpEx, NOI = $102,600

Why it matters: The most important metric in commercial real estate. Used to value properties and calculate cap rates.

The ratio of NOI to property value, representing the unleveraged yield of a property.

Example: With $102,600 NOI and $2M purchase price, Cap Rate = 5.13%

Why it matters: Lower cap rates indicate lower risk/higher prices. Used to compare properties and determine value.

The cap rate at the time of purchase, based on Year 1 NOI and purchase price.

Why it matters: Shows your initial yield on the property. Compare to market cap rates to assess if you're paying a fair price.

The assumed cap rate at which you will sell the property at the end of your hold period.

Example: If final NOI is $120,000 and exit cap is 6%, sale price = $2,000,000

Why it matters: Critical assumption for calculating returns. Higher exit cap = lower sale price. Be conservative.

The portion of the purchase price paid in cash at closing.

Example: For a $2M property with 25% down, down payment = $500,000

Why it matters: Larger down payments reduce loan amount and monthly payments but require more capital upfront.

The principal amount borrowed to finance the property purchase.

Example: For a $2M property with $500,000 down, loan = $1,500,000

Why it matters: Determines your monthly payments and interest costs over the loan term.

The ratio of the loan amount to the property value.

Example: A $1.5M loan on a $2M property = 75% LTV

Why it matters: Lenders typically require LTV under 75-80%. Lower LTV = lower risk = better terms.

The annual percentage rate charged on the loan principal.

Example: A 6.5% interest rate on a $1.5M loan = approximately $97,500/year in interest (first year).

Why it matters: Directly impacts monthly payments and total cost of borrowing. Even small rate changes significantly affect returns.

The length of time over which the loan is amortized (paid off).

Example: A 30-year term means payments are calculated to pay off the loan in 30 years.

Why it matters: Longer terms = lower monthly payments but more total interest paid.

The total amount of principal and interest payments on the loan over a year.

Example: If monthly payment is $9,500, annual debt service = $114,000

Why it matters: Must be covered by NOI for positive cash flow. Key factor in calculating DSCR.

The ratio of NOI to annual debt service, measuring ability to cover loan payments.

Example: With $102,600 NOI and $95,000 debt service, DSCR = 1.08

Why it matters: Lenders require DSCR of 1.20-1.25+. Below 1.0 means negative cash flow. Higher is safer.

The actual cash generated by the property after all operating expenses and debt service.

Example: With $102,600 NOI and $95,000 debt service, CFBT = $7,600/year

Why it matters: What you actually put in your pocket (before taxes). Positive cash flow is essential.

The annual cash flow as a percentage of the total cash invested.

Example: With $7,600 annual cash flow and $550,000 total investment, CoC = 1.38%

Why it matters: Measures the return on your actual cash invested. Aim for 8-12%+ depending on market.

The annualized rate of return that accounts for the timing and size of all cash flows.

Example: An investment with irregular cash flows might have a 15% IRR over 5 years.

Why it matters: The most comprehensive return metric. Accounts for time value of money. Target 15-20%+ for value-add deals.

The difference between the present value of all future cash flows and the initial investment.

Example: If discounted cash flows total $600,000 and you invested $550,000, NPV = $50,000

Why it matters: Positive NPV means the investment exceeds your required return. Higher is better.

A valuation method that discounts all future cash flows to their present value.

Why it matters: Used to determine the intrinsic value of an investment. If DCF > Purchase Price, it may be undervalued.

The total cash returned divided by the total cash invested.

Example: If you invest $100,000 and receive $180,000 total, equity multiple = 1.8x

Why it matters: Simple measure of total return. 2.0x means you doubled your money. Does not account for time.

The rate used to discount future cash flows to present value, representing your required rate of return.

Example: Using an 8% discount rate means you require at least 8% annual return on your investment.

Why it matters: Higher discount rates result in lower present values. Should reflect risk and opportunity cost.

The expected length of time you plan to own the property before selling.

Example: A 5-year hold period means you plan to sell after 5 years.

Why it matters: Affects total returns, tax implications, and exit strategy. Typical hold periods are 5-10 years.

The estimated sale price of the property at the end of the hold period.

Why it matters: Often represents the majority of total returns. Heavily dependent on exit cap rate assumption.

The percentage of the property or entity that an investor owns.

Example: If you invest $100,000 of a $500,000 total equity requirement, you own 20%.

Why it matters: Determines your share of cash flows, distributions, and sale proceeds.

The total capital contributed by an investor.

Why it matters: Should be proportional to ownership unless there are preferred return structures.